DOMESTIC shareholders are ramping up borrowing against shares, driving revenue for brokerages but creating risk of a chain reaction in the event of a sharp market downturn.

Shareholders in 317 Shanghai and Shenzhen-listed firms had pledged shares worth at least 40 percent of those firms by Dec. 18, up from 224 firms a year ago, according to Wind Info.

Share pledging is especially common for small and mid-cap companies, where a single shareholder often owns a large stake. Controlling shareholders sometimes reinvest the proceeds into company projects or buy additional company shares on the secondary market to boost the share price.

Offering loans against pledged shares has also become big business for domestic brokerages, which have long sought new business lines to reduce their reliance on trading commissions.

Interest income from the sale and repurchase of financial assets — a category that mostly comprises loans against pledged shares — rose by 25 percent in the first half of this year from the same period in 2016 at 29 domestically listed brokerages, buffering a 2 percent decline in overall operating income.

But analysts warn that share pledging can amplify a market downturn. If a company’s share price drops below a designated stop-loss level, the lender will liquidate the pledged shares, pushing the share price down even further.

Liquidation of pledged shares was seen as a likely contributor to a steep drop in Hong Kong’s small-cap Growth Enterprise Market in late June, when 17 stocks fell by more than 40 percent in a single day.

Jia Yueting, the largest shareholder in troubled LeEco, has pledged 39 billion yuan (US$5.95 billion) worth of shares in the group’s Shenzhen-listed unit, Leshi Internet Information, to 13 different financial institutions, according to Wind Info.

Jia largely used the funds to finance his aggressive expansion into areas such as electric cars, movie production and mobile phones. (SD-Agencies)